The AAII Sentiment Survey is one of the oldest and most widely followed measures of individual investor sentiment. Published weekly by the American Association of Individual Investors since 1987, this survey provides a direct window into the minds of retail investors. Learning how to interpret and apply this data can help you identify potential market turning points and avoid common crowd behavior mistakes.
What is the AAII Sentiment Survey?
The AAII Sentiment Survey asks members one simple question: Do you feel the stock market will be up, down, or unchanged over the next six months? Respondents choose bullish (up), bearish (down), or neutral (unchanged). The results are compiled weekly and released every Thursday after the market close.
Why it matters: The survey captures the emotional state of individual investors who collectively manage trillions of dollars. When retail sentiment reaches extremes, it often marks significant market turning points. Historically, extreme bearishness has preceded rallies, while extreme bullishness has often preceded corrections.
Historical Averages and Context
To interpret current readings, you need to understand the historical averages:
- Bullish average: 37.5% of respondents
- Bearish average: 31.0% of respondents
- Neutral average: 31.5% of respondents
The bull-bear spread, calculated as bullish percentage minus bearish percentage, averages around +6.5%. This slight bullish bias reflects the long-term upward drift of stock markets and the optimistic nature of stock market participants.
Interpreting Extreme Readings
Extreme sentiment readings often coincide with market inflection points:
Extreme Bearishness (Below 20%)
When bullish sentiment falls below 20%, fear dominates the market. Historically, these readings have often occurred near market bottoms. The logic is straightforward: if most investors are already bearish and have sold, there are few sellers left and plenty of potential buyers.
Historical Example
In March 2009, near the bottom of the financial crisis, bullish sentiment dropped to just 18.9% while bearish sentiment reached 70.3%. This extreme fear marked the beginning of an eleven-year bull market. Investors who bought when others were most fearful achieved exceptional returns.
Extreme Bullishness (Above 50%)
When bullish sentiment exceeds 50%, optimism is widespread. While this can persist during strong bull markets, extended periods of extreme bullishness often precede corrections. If everyone is already bullish and invested, who is left to buy?
The Bull-Bear Spread
Many traders focus on the spread between bullish and bearish readings rather than individual numbers. Key levels to watch:
- Spread above +30: Extreme optimism, potential warning sign
- Spread between -10 and +20: Normal range
- Spread below -20: Extreme pessimism, potential buying opportunity
The Contrarian Approach
The AAII survey is primarily used as a contrarian indicator. The basic principle: do the opposite of what the crowd is doing at extremes. When everyone is bullish, consider reducing exposure. When everyone is bearish, consider increasing exposure.
However, contrarian trading requires patience and discipline. Sentiment extremes can persist for weeks or even months. The survey tells you what sentiment is, not when it will change. Use it as one input among many, not as a timing tool.
Combining AAII Data with Other Indicators
The AAII survey becomes more powerful when combined with other analysis:
Technical Confirmation
Wait for price action to confirm sentiment extremes. If the AAII survey shows extreme bearishness and the market is forming a technical bottom with positive divergences, the signal is stronger than sentiment alone.
Other Sentiment Measures
Compare AAII readings with other sentiment indicators:
- Fear and Greed Index
- Put/Call ratios
- VIX levels
- Investors Intelligence survey (professional advisors)
When multiple sentiment indicators align at extremes, the contrarian signal is more reliable. Divergences between different sentiment measures can also provide useful information.
Fundamental Context
Consider the fundamental backdrop. Extreme bearish sentiment during an economic recession requires different interpretation than extreme bearishness during a healthy economy. Context matters for determining whether to act on sentiment signals.
Limitations of the AAII Survey
While valuable, the AAII survey has important limitations:
- Sample size: Only a few hundred responses each week, which can create volatility in readings
- Self-selection: AAII members may not represent all individual investors
- Weekly frequency: Markets can move significantly between surveys
- Sentiment vs. positioning: What investors say they feel may differ from how they are actually positioned
- Changing demographics: The AAII membership has evolved over decades
Important: The AAII survey measures what retail investors feel, not necessarily what they do. An investor can feel bearish but still hold stocks due to inertia, tax considerations, or lack of alternatives. Always consider this gap between sentiment and action.
Practical Trading Applications
Long-Term Investors
For long-term investors, the AAII survey can help with lump-sum investment timing. Consider deploying cash when bearish sentiment is elevated, as this often coincides with lower prices and better long-term returns. Avoid adding significant new money when bullish sentiment is extreme.
Swing Traders
Swing traders can use sentiment extremes to improve entry and exit timing. Look for technical setups that align with contrarian sentiment signals. Extreme bearishness combined with oversold technical readings can identify high-probability long entries.
Options Traders
Options traders can adjust strategies based on sentiment. When bullish sentiment is extreme, implied volatility is often low, making it a good time to buy options. When bearish sentiment is extreme, volatility is high, favoring option-selling strategies.
Tracking Sentiment Over Time
Rather than reacting to individual weekly readings, track sentiment trends over time. Several weeks of persistently extreme readings are more significant than one-off spikes. Moving averages of sentiment data can smooth out noise and identify meaningful shifts.
Consider creating a sentiment dashboard that tracks:
- Current week AAII readings
- Four-week moving average of bull-bear spread
- Historical percentile ranking of current readings
- Comparison with other sentiment indicators
Track All Your Trades in One Place
Pro Trader Dashboard helps you analyze how sentiment conditions affected your trading performance over time.
Summary
The AAII Sentiment Survey is a valuable tool for gauging retail investor mood. Published weekly since 1987, it provides a long history of data showing how individual investors have felt at various market junctures. The survey works best as a contrarian indicator at extremes, though patience is required because sentiment can remain extreme for extended periods. Combine AAII data with technical analysis and other sentiment measures for more robust trading signals.
Related reading: Fear and Greed Index Guide and Trading Psychology Tips.